Fierce competition in the fast-growing but controversial cash-advance card market has seen the first player quitting the game last month, but industry veterans said that it is unlikely to be an isolated case and more withdrawals of banks from this aspect of consumer banking are expected in the future.
Less than a year after it had joined the seemingly lucrative cash-card race, the Taipei-based Bank of Overseas Chinese (華僑銀行) decided to dispose of all its cash-card customers in March.
But actually the lender, 11.4 percent owned by the government, ceased issuing new cash cards to customers in April last year, as a way to improve its bad loan ratio.
PHOTO: CHU PEI-HSIUNG, TAIPEI TIMES
The bank formally dropped out of the market last month, reducing the number of cash-card issuers in the nation down from 34 to 33, the Financial Supervisory Commission announced at a press conference last week.
The bank still had over 3,000 effective cash cards in February and the number was cut down to zero in March, according to the commission's Bureau of Monetary Affairs data.
Jong Huey-jen (鍾慧貞), the bureau's deputy director general, said the Bank of Overseas Chinese has helped these customers transfer to small-amount loan programs or other consumer banking projects, paving the way for its formal exit out of the white-hot race.
Cash cards, which first appeared in the Taiwan market after Cosmos Bank Taiwan (萬泰銀行) introduced its George & Mary card in 1999, allow holders to borrow cash on an unsecured basis via automatic teller machines.
As of the end of March, 3.81 million cash cards were issued in Taiwan, with an outstanding loan figure of about NT$270.5 billion, according to the bureau.
The three largest cash-card issuing banks control more than 50 percent of the market: Cosmos Bank, Taishin International Bank (台新銀行) and Chinatrust Commercial Bank (中國信託).
Whether the Bank of Overseas Chinese's exit from the cash-card business will cool down the feverish development in the nation's consumer finance industry awaits observation.
But financial regulators are placing more restrictions on cash-card issuers, hoping to regulate the booming market and protect consumers' rights and interests.
In the wake of the abuse of cash cards by young users, the regulators have been increasingly pressuring local lenders, demanding they equip themselves with sophisticated monitoring and collection systems, as well as comprehensive credit policies to control credit risk.
The latest regulations passed by the commission on Thursday stipulate that, starting this month, all TV and movie commercials and print advertisements promoting cash cards must have warning phrases saying that this consumer product must be used carefully.
Lu Daung-yen (呂東英), vice chairman of the Financial Supervisory Commission, said if banks fail to abide by the standards, the maximum punishment is to suspend their cash-card operations.
The regulations also raise card applicants' eligibility requirements, demanding that those who already own five cash cards present salary or financial statements when applying for an additional one.
Card issuers are also banned from giving away gifts as part of their marketing strategy, the commission said.
The government's worries apparently are not baseless, as the eligibility requirements for cash cards are significantly lower than those for other types of consumer debt such as credit cards, with some lenders even issuing cards to prospective applicants with no steady income.
Cash cards, if well managed, can be very helpful for borrowers in emergencies, and can be very profitable for lenders because they encourage utilization, generate high returns and support client retention.
Problem borrowers
But as most issuing banks carry a minimum monthly payment as low as 2 percent of the total amount owned, Standard and Poor's warned in a report that it may lead to increased risk, higher delinquency, and losses if credit controls are insufficient to manage problem borrowers.
The international rating agency said the worst scenario would be the consumer lending industry collectively restricting lending and thus creating a liquidity squeeze for marginal borrowers.
But not many people are aware of the pitfalls and a recent survey shed some light on how the general public views this financial product.
Realizing dreams
In a report released by the Shanghai Commercial & Savings Bank (上海商銀) and the Taiwan branch of Lifeline International last week, 30 percent of the 405 interviewed cash cardholders said they believed in commercials' pitch that cash cards could help them realize their dreams, be it studying abroad, starting their own business or shopping.
The survey said these people's values and consumption behavior was swayed by commercials, as they each had an average of two cash cards and the debt incurred even tripled their monthly income.
In a detailed analysis, respondents between the age of 25 and 34 have, on average, debts around NT$154,900 on their 1.88 cash cards. Those in the 35-to-45 age bracket incur an average debt of NT$257,800 each on 2.4 cash cards.
Moreover, they have developed an erroneous concept, believing that cash cards can be used as a long-term tool to meet their cash needs, the report said.
But according to S&P's analyses in other mature markets, losses from revolving cards, especially those with lower repayment rates, tend to take a long time to surface.
Losses often take up to 24 months to materialize.
In new markets, where consumer lending is just beginning to grow and where providers are aggressively expanding their businesses, problem loans may take even longer to surface, the S&P said.
Regarding what some people describe as a disorderly approach toward the cash-card business, bank executives, however, have different views, saying that cash cards can actually be a useful means of improving peoples' lives.
"The cards have been demonized but their positive image must be publicized too as they help reduce underground, illegal financial activities," said Leo Kao (高永和), manager for consumer finance at Taipei Fubon Bank (台北富邦銀行).
Kao said although the way his bank approaches prospective customers is relatively conservative compared with other players, the bank will continue to invest in its marketing resources, hoping to move forward by two places to become the nation's eighth-biggest cash-card issuer this year.
Risk management
To ensure their customers are capable of repaying the money, Taipei Fubon Bank only issues cash cards to those between the age of 28 and 55, as well as those above 24 who have used other banks' cash cards for more than a year, Kao said.
"Only with better basic infrastructure and risk management capabilities can the issuers survive in this game," he said.
Chinatrust Commercial Bank (中國信託), the third-largest cash- card player with a 9 percent market share in terms of total credit, also vowed to continue placing commercials to secure its market presence despite stricter regulations.
"The big will become bigger and only the top five players will make profits," said Richard Yang (楊鎧榮), Chinatrust's vice president for consumer banking.
In accordance with this theory, Yang said the exit of the Bank of Overseas Chinese will not be an isolated case and other smaller late-comers are expected to fade out of the market.
Joy Tang (湯碧秋), general manager of the cash card department at Union Bank of Taiwan (聯邦銀行), echoed his view, saying that "smaller players will find it increasingly difficult to survive" especially when the implementation of new governance regulations will prolong the time before banks can secure profits.
Cautious attitude
In contrast to others' ambitious market positioning, several banks have decided to adopt a conservative and cautious attitude in exploring the market, which has been developed since 1999 when Cosmos Bank Taiwan (萬泰銀行) issued the nation's first cash card.
The Chinese Bank (中華商銀) will decrease its annual marketing budget and focus on analyzing its cardholders' consumption behavior before extending credit for good customers.
Ta Chong Bank (大眾銀行) plans to adjust its scoring system to better select first-time applicants, while First Commercial Bank (第一銀行) has repositioned its operation directions and the cash card segment is not listed as the key business any more.
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